Sales Budget & Forecasting

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Sales Budgets

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Sales Budget

• Why a Sales Budget?

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Benefits of Budgeting

a) Improved Planning: Action to be taken is described in

quantitative terms.

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a) Improved Planning: Action to be taken is described in quantitative terms.b) Better coordination & communication: All departments have budgets which give future course of

action – interaction between departments. Eg. Increased Sales Increased Production Increased Finance Increased MIS / HR

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c) Control & performance evaluation Control & performance evaluation:

Budgets outline objectives and responsibilities so performance evaluation and control is easy. Eg. Expense monitoring,

d) Psychological benefits: Instills profit orientation / expense control / culture

in organization

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Types of Budgets

a) Sales Budget

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Types of Budgets

a) Sales Budget Detailed Plan showing the Expected Sales for a

Future Period …. Developed based on expected revenue (S-

forecast) Gives sales by geographically location / product

service / sales people & customers First part of Master Budget; Usually forms the

basis for other operational budgets like finance & production.

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Types of Budgets

b) Selling – Expense Budget Salaries / Commissions Traveling / Entertainment Training (new products)

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Types of Budgets

b) Selling – Expense Budget Salaries / Commissions Traveling / Entertainment Training (new products)

c) Administrative Budget & Profit Budget, Rent, Electricity, Office Furniture, Stationery

GP = sales revenue – sales expenses

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Methods of Budgeting for Sales Force

a) Affordability Method: Management develops SB depending on

ability to spend on sales function; usually fall short of sales dept’s

requirementsb) Percentage of Sales Method: Multiply sales revenue by a given %; Sales revenue = Past revenue / forecasted

figure / weighted average of bothc) Competitive Parity: Based on budgeted figure of competitors or

industry average; competitor comparable in size and revenue is chosen

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Types of Budgets

d) Objective & Task: a), b), c) do not take cognizance of

organization’s objective in developing budget. Identify objective with employees Identify tasks for achieving objective Expenditure required Form budget

e) Return Oriented Method: ROI, ROA, ROTA, ROAM (Assets

Management)

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Successful Budgeting

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Successful Budgeting• Involvement & Support of Top Management Support Budgeting & ensure all-round

participation; should not be viewed as a pressure tactic but as an effective tool for performance;

ii. Flexibility in Budgeting Should be adjustable to fast changing

environmental conditions

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How to develop a Sales Budget

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1. Review and Analysis Collection of past data and study of variances

between projected and actual2. Identifying market opportunity and problems3. Sales forecasting 4. Communication of Sales goals & objectives Involvement of sales people is essential for mutual

agreement

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5. Allocation of resources Selecting salespeople, tools of sales, financial

resources6. Preparing the budget Balance between sales force capability and

market opportunities 7. Approval for the budget

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Sales Forecasts

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• Market Potential Vs Sales Potential

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Sales Forecasts

1. Market Potential: Maximum possible sales opportunities in part. mkt. segment, over a future period, assuring application of appropriate marketing methods.

2. Sales Potential: maximum possible sales opportunity for specific company in part. Mkt. segment over future period.

MP : Total Industry SP : Part. Co.

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Sales Forecasts

3. Sales Forecast: In Re/Units, how much of a company’s product can be sold over a future period, under a given marketing program on assumed set of external factors.

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Market Potential Analysis

i. Market identificationii. Ability to buyiii. Willingness to buySources of Data: a) Secondary: Environment Analysisb) Primary: Customers spending patterns,

preferences

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Why is SP different from SF?

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Why is SP different from SF?

i. Inadequate Production Capacityii. Inadequate Distributioniii. Inadequate Financesiv. Profit Orientation: Profitable Sales vs. Possible

Sales

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Analyzing Market Potential

i. Top down: Top mgmt. assesses market on basis of macro environmental data

ii. Bottom up: Micro enviro. factors of market like customer, products, ability to buy etc. are analyzed by lower management

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Sales Forecasting Method

i. Qualitative Forecastsa) Judgment Methodsb) Counting Methods

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Judgment Methods

1. Delphi Technique: Systematic Method for obtaining consensus from a group of experts.

2. Nominal Group Technique: Experts from diverse backgrounds

3. Jury of Executive Opinion: Opinions of executives at top level, based on experience & utilization – Lacks scientific validity senior most opinion prevails.

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Counting Methods

1. User Expectations: Usually for industrial products by directly getting data from customers.

2. Sales Force Composite: Estimate of expected sales from every salesperson; can over/under estimate, lack broader perspective.

3. Market Tests: Limited area consumer acceptance.

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Quantitative Forecasts

1. Time Series Analysis: Estimation of future trends based on past performance; Long Term Forecasts

Sales = T (long term variations × C (cyclical variations) × S (Seasonal changes) × I (Irregular changes in environment)

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2. Moving Average: Sales forecasts on sales of previous period: assumes environmental irregularities in past will be there in present.

nSales.......SalesSalesSales(Sales nt2t1tt

1t

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3. Exponential Smoothing Refines (2) – More weightage to sales in recent periods vis-à-vis older periods.

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4. Regression & Correlation (Multiple Regression) Correlation: Degree of relationship between sales & other variables.

Regression: Identify factor that influence sales & predicts changes in one variable due to changes in other.

Most popular & widely used method Identifies relationship between sales and other

independent factors on which sales is dependant.

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Which method to use?

a) Accuracy: Quantitative better than qualitative, short term: exponential method is accurate; more than six months: exponential

smoothing and moving averages more than one year: regression b) Costsc) Data availabilityd) Software availability: models and

applications for forecasting need different types of data

e) Companies experience in forecasting

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Forecasting is effective if it is:

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Forecasting is effective if it is:

a) Accurateb) Cost effectivec) Comprehensibled) Timelye) Flexiblef) Plausible: Has to be done with sincerity hence

no manipulation of figures under pressure can be allowed; Top Management has to be willing to face accurate estimates even if they are not rosy.

g) Durable: By using quantitative techniques, combining forecasting techniques; using software.

Sales Budget & Forecasting

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